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Second Look at First Data

The money-mover announces a surprise spin-off.

On Wednesday, while previewing yesterday's earnings report from First Data(NYSE:FDC), I noted that the company had retained investment banker Morgan Stanley(NYSE:MS) to help find a buyer for its underperforming credit card division. The company seemed intent on spinning the unit off, in hopes that the rest of First Data could grow faster when released from its drag. I therefore advised Fool readers to keep an ear open for clues of when and if the spin-off might occur.

As it turned out, a spin-off is in the works -- but it's not the credit card division leaving the nest. Rather, First Data will spin off its star subsidiary: Western Union. What remains of First Data will then be reorganized into three divisions: "Financial Institution Services" (including the credit card unit), "Commercial Services," and "International."

Western Union won't be sent off alone, however. Tagging along will be two smaller divisions: Orlandi Valuta and Vigo. Western Union will remain the world's largest money-transfer company, with 271,000 agent locations shuffling 275 million annual money transfers among more than 200 countries and territories.

In further numbers-related news, First Data missed analyst estimates for its quarterly earnings, posting profits from continuing operations of just $0.53 -- far below the $0.65 per share that Wall Street was hoping to see. The miss arose primarily from a series of non-cash charges incurred for restructuring and integration costs. Not that the miss hurt First Data's shares one whit. Thanks to a bullish pronouncement from a J.P. Morgan(NYSE:JPM) analyst who endorsed the spinoff plans, First Data shares leapt more than 5% in the wake of the earnings release.

Margin watchFor Fools keeping score on First Data's margin performance, you can (provisionally) update the table I provided yesterday as follows: Gross margin for the quarter totaled 38%; operating margin was 18.4%; the net came in at 14.4%. (Take these numbers with three grains of salt. My data provider hasn't updated its margin calculations yet, so I'm guessing at what expenses they included under each category). Each of those numbers will continue to drag on the company's trailing-12-month margin results.

Speaking of margins, in reviewing the company's trends yesterday, I suggested that increased interest payments and non-cash restructuring charges sparked the recent margin declines. That's true -- but only partly so. I've since conferred with my friend Philip Durell, the clever Fool who recommended First Data to readers of the Motley Fool Inside Value newsletter long before this spin-off. Philip pointed out that what happened was less a case of First Data's 2005 results being particularly bad, and more a case of the 2004 results being exceptionally good. Several one-time gains recorded in June 2004 juiced First Data's returns with an extra $461 million in profits -- making 2005 look less profitable in comparison.

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Fool contributorRich Smithdoes not own shares of any company named above.

Author

I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.